An Open Letter to the Last IRS Commissioner

Phoenix lawyer Bob Kamman, an occasional guest blogger and frequent commenter, turns 74 this week. He tells us that his clients won’t allow him to retire. And, some of them must file California returns, so he keeps up with developments west of the Colorado River.

Mr. Charles Rettig

Beverly Hills

I bet it feels great to be back in California, even with the recent bad weather and worse mass shootings.  At least you are thousands of miles from the Capitol, where IRS is not always welcome or appreciated.  Now that you are back among friends, though, you probably are expected to answer their tax questions.  I can guess which one comes up the most: the MCTR.

Californians wish you had pushed IRS to answer this question before you left office  November 12.  After all, IRS should have anticipated it when Governor Newsom signed AB 192 into law on June 30, 2022.

More than 30 million beneficiaries know about Middle Class Tax Relief, but the rest of the country might want some details.  It provided payments ranging from $200 to $1,050 for residents who filed a 2020 state income tax return with AGI less than $250,000 (single) or $500,000 (joint).  Yes, in California that’s middle class.

But these were not tax rebates or tax refunds, because they weren’t based on whether tax was paid or how much.  The General Assembly explained the purpose:

“Increased costs for goods, including gas, due to inflation, supply chain disruptions, the effects of the COVID-19 emergency, and other economic pressures have had a significant negative impact on the financial health of many Californians. The Legislature hereby finds and declares that the payments authorized . . .as added by this act, serve the public purpose of providing financial relief for Californians who may have been adversely impacted by these economic disruptions and do not constitute gifts of public funds within the meaning of Section 6 of Article XVI of the California Constitution.”

The state initiated direct deposits to more than 7 million filers, and then mailed another 9 million debit cards.  Total cost: about $9 billion.  And they haven’t finished yet. 

The state law made it clear that these payments were not subject to state income tax.  But apparently no one was sure how IRS would view them.  So with an abundance of caution, envelopes and postage, the Franchise Tax Board (that’s what California calls its Department of Revenue) decided to send 1099-MISC forms to anyone who received $600 or more.  The FTB explained it was doing this because “The MCTR payments may be considered federal income.”

Or, they may not be.  Don’t ask them, ask IRS.  It must be a difficult question, because so far there is no answer.  And it has now become a subject of debate for tax practitioners.

There are those for whom “may be considered federal income” means “must be, if there is a 1099.”  They are preparing and electronically filing returns already because they don’t want their clients to receive a CP-2000 notice proposing an assessment  next year. 

But there are others who reason that these payments come under the category of “general welfare.”  The Internal Revenue Service has consistently concluded that payments to individuals by governmental units under legislatively provided social benefit programs for the promotion of the general welfare are not includible in a recipient’s gross income (“general welfare exclusion”). See, e.g., Rev. Rul. 74-205, 1974-1 C.B. 20; Rev. Rul. 98-19, 1998-1 C.B. 840. To qualify under the general welfare exclusion, payments must: (i) be made from a governmental fund, (ii) be for the promotion of general welfare (i.e., generally based on individual or family needs), and (iii) not represent compensation for services. Rev. Rul. 75-246, 1975-1 C.B. 24; Rev. Rul. 82-106, 1982-1 C.B. 16. 

You see the problem here?  And why it would be helpful to have a respected  tax expert from California  push IRS to decide how to answer this question, before the Taxpayer Service phone lines are jammed with Californians calling to ask what to do with their 1099 from the FTB?

The San Francisco Chronicle tried to get an answer from IRS in December. But it reported:

“The IRS could not provide a clear answer. ‘I can tell you, we are aware of it. California is not the only state doing this,’ IRS spokesman Raphael Tulino said. The only answer Tulino provided was this excerpt from IRS Publication 525. ‘In most cases, an amount included in your income is taxable unless it is specifically exempted by law. Income that is taxable must be reported on your return and is subject to tax. Income that is nontaxable may have to be shown on your tax return but isn’t taxable.’”

Fortunately, there is still one Great California Hope left in D.C. who might be able to push for an IRS answer.  She is National Taxpayer Advocate Erin Collins.  Her job is to listen to everyone, but she might pay more attention to you if you could explain to her the importance of this matter.  Please, send her a text or give her a call. 

Thanks in advance,

Bob Kamman

P.S.  Do you ever hear from Kevin McCarthy or Nancy Pelosi?  They might also encourage IRS to provide guidance for their constituents.

Tax Court Trial Procedures: Guidelines from Judge Jones

Last week I attended my first Washington, D.C. calendar call, over which Judge Jones presided. This post describes the trial procedures announced at calendar call. While the procedures may be especially helpful in cases conducted by legally unsophisticated pro se petitioners, they offer excellent advice for attorneys appearing before any Tax Court judge.

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Before getting to the trial procedures I want to mention one curious difference between the calendar call in D.C. and the calendar calls in Philadelphia which I’ve attended for the last four years.

Three women in suits stand in front of a gray wall. On the wall is "United States Tax Court" in white. It is a cloudy and windy day.

When I arrived last Monday the trial clerk informed me that the docket was down to 7 cases, all with self-represented petitioners. I did not expect much “action” knowing that attorneys and students from American University (photo at left), UDC, Catholic University, and Legal Services of Northern Virginia were planning to attend and offer assistance. Frankly it seemed like overkill to bring everyone to court.

I was astonished when 6 of the 7 petitioners stood up at calendar call. Soon every clinic was busy advising a petitioner. According to the other clinic directors this is usual in D.C.

Unfortunately it is not the norm in Philadelphia. We have very low attendance, sometimes with zero petitioners attending. If we are lucky, one person out of ten will show up. I do not know why attendance from self-represented taxpayers would be so much higher in D.C. than in Philadelphia. It would be an interesting study if anyone would like to conduct it.

General Trial Procedures and Courtroom Rules

Judge Jones has helpfully compiled Instructions to the Parties Regarding Trials and Courtroom Rules Governing Conduct During Proceedings of the U.S. Tax Court, which are available as a single stapled packet during calendar call.

Anyone who has taken a trial advocacy course should be familiar with the guidelines (e.g., address all remarks to the Judge; keep your face neutral during witness testimony). The packet helpfully sets out the guidelines logically and succinctly. The Trial Instructions cover

  1. Opening Statements and Examining Witnesses
  2. Objections To Questions
  3. General Decorum
  4. Promptness of Counsel And Witnesses
  5. Exhibits
  6. Advance Notice of Difficult Questions
  7. Briefing Schedule
  8. Other Rules

The general Courtroom Rules document attached to the trial instructions also applies to conduct during calendar call. It addresses these topics:

  1. Courtroom Decorum
  2. Security
  3. Broadcasting and Photographs
  4. Sanctions
  5. Additional Orders  

Keep in mind that Judges may have different preferences in a few areas covered by the packet, and it is always wise to know your judge. If you don’t know your judge, Judge Jones’s instructions will guide you to make safe choices, but don’t be surprised if your judge expresses different preferences. For example, Judge Jones’s procedures direct the parties to keep opening statements under ten minutes. In contrast the late Judge Ruwe preferred that the parties waive opening and closing arguments, but he would permit them if a party insisted. As another example, it is always best to ask the Court’s permission to approach a witness as required by Judge Jones’s instructions. But, some judges will advise that you do not need to keep asking each time during an examination.

Framework for Trying Business Expense Disputes

Sole proprietorship trade or business expenses were the number one issue petitioned to the Tax Court by business taxpayers in FY 2022, according to the National Taxpayer Advocate’s 2022 Annual Report to Congress. It wasn’t even close:

2022 NTA ARC p. 177

Many of these cases will be settled by Calendar Call, but the Court still must regularly handle disputes over business expenses. For low-income taxpayers these usually involve Schedule C expense substantiation. When we consult with taxpayers in this situation two challenges often arise – lack of preparation and organization makes it challenging to prove expenses on a granular level; and lack of understanding about the legal context. Self-represented petitioners often do not understand when Respondent is making a legal argument about their expenses (e.g. clothes suitable for everyday wear are not deductible) versus when Respondent is making a substantiation argument (e.g. the receipt does not show what was purchased). And when the underlying documents are not organized for trial, it can be a frustrating exercise for everyone. Even when receipts were kept organized, they are often voluminous, and unfortunately cheap register tape fades over time.

Given the regularity with which these problems occur, Judge Jones wisely imposes order on the process and requires detailed preparation on both sides. Before trial begins, Judge Jones requires each party to complete a worksheet provided by the court.

The worksheet includes this example of a correctly completed form:

Petitioner is the owner of a sports bar and restaurant and claims a $5,000 advertising expense deduction on his Schedule C, Profit or Loss From Business, attached to his 2009 Federal income tax return. Petitioner’s advertising expense consists of: (1) A $3,000 advertisement placed in a national newspaper; (2) a $ 1,000 advertisement placed in a local newspaper; and (3) a $1,000 advertisement on a billboard. Respondent concedes that $ 1,000 of the $5,000 advertising expense is deductible, but disallows the remaining $4,000 for lack of substantiation.

Judge Jones also explained that she tries substantiation cases year by year, and item by item within each year. For example, a two-issue case covering two tax years might proceed like this: evidence on 2018 car and truck expenses, then 2018 office expenses, then 2019 car and truck expenses, then 2019 office expenses.

Conclusion

The substantiation worksheet and the trial guidelines are useful preparation documents for attorneys. But more importantly, both of these documents should help a self-represented petitioner present their best possible case to the Court, so that the case can be decided on its merits and the petitioner can truly be heard.

January 2023 Digest

It’s hard to believe we’re already one month into the new year and tax filing season has begun. It feels like the IRS’s front-line operations are improving, but of course, there is always more work to do. The government, tax practitioners, and academics are starting the year off strong by focusing on the significance of racial disparities within our tax system in working papers and studies. There is a symposium on the topic next month and a CTR series planned for the fall.

Tax and Race

Next Month’s Symposium Highlighting Relationship Between Tax and Race: A symposium focusing on the relationship between tax and race will be held in-person and via Zoom on February 24, 2023. The symposium will cover existing and developing research in this area. In the same vein, the Treasury recently released a working paper that finds significant racial disparities in the tax system.

Racial Disparities in IRS Audits: A must-read study by the Stanford Institute for Economic Policy Research found that black taxpayers are audited significantly more often than non-black taxpayers. As stated in the post, “the study concludes that the objective of the predictive model underlying audit selection, along with operational considerations such as employee expertise, costs of audits, and congressional or other expectations, can be “critical drivers of disparity.””

Collection Due Process Considerations

Caleb’s thought-provoking three-part series contemplates the ways in which a taxpayer could possibly secure a refund in a CDP hearing and elaborates upon the ways a taxpayer is and isn’t limited by the Tax Court’s lack of refund jurisdiction.

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“Refunds” and CDP Review: The first post dives into whether it’s possible to get improperly levied funds back from the IRS through a CDP hearing despite the Tax Court’s lack of refund jurisdiction. It includes a discussion of a recent case, Shwartz, which involved a credit-elect and demonstrates the ability of the Tax Court to resolve issues in CDP even if it cannot order specific relief.

Getting a Refund in CDP: Don’t Call it a (Rebate) Refund: The second post dives further into the argument that the Tax Court can order a refund in CDP, even if it can’t use those exact words. A footnote in Greene-Thapedi suggests that the Tax Court may consider overpayments when they are relevant to a proposed collection action. The significance of other cases where money has been returned are also discussed.

Getting Refunds in Collection Proceedings: Why CDP Matters: The third post looks at the people and processes that resolve most CDP controversies and emphasizes that there may be ways to get a refund in an administrative CDP hearing, even if it’s not possible in Tax Court.

Recommendations for Congress

Math Error and Limited Taxpayer Remedies: The remedies available to challenge incorrect math error adjustments are limited. The IRS can disregard an abatement request or fail to explain the reason for an assessment or fail to issue a notice of deficiency and leave taxpayers without much recourse. Congress could address the issue by expanding the Tax Court’s jurisdiction to allow it to enjoin the IRS or to review cases where a math error is not timely abated.

Exempting the Earned Income Tax Credit from the Bankruptcy Estate: Many states have exempted EITC refunds from a bankruptcy estate because the payments are considered welfare payments. This is not true for all states as the debtor from New Mexico in In re Medina discovered. Congress could address the issue by passing legislation that exempts federal anti-poverty payments for all states.

Recommendations for the Treasury and IRS

FOIA Appeals and Exception 21: Comments were requested on proposed regulations related to Appeals resolution of federal tax controversies. One comment recommended that FOIA disputes be removed from Appeals jurisdiction. This post argues that despite problems with Appeals in this realm, it is still best equipped to handle FOIA disputes. The post goes on to discuss exception 21 and why its current form allows Counsel’s Office too much deference to determine which cases can be withheld from Appeals.

IRS Requests Comments on Forms 3520 and 3520-A: The IRS is requesting comments on Form 3520 and 3520-A as part of a routine OMB review. This post provides some insight into the process, some tips for viewing the IRS’s written discussion of public comments online, and shares observations about the compliance burdens related to the forms.

GAO Report of Refunds and Customer Service:  Charts from the GAO report entitled: “2022 Tax Filing – Backlogs and Ongoing Hiring Challenges Led to Poor Customer Service and Refund Delays” are shared. The charts convey information about IRS hiring timelines, appropriations, correspondence inventory, tax return processing, telephone service, and taxpayer wait times.

Now is the Time for IRS to Enhance Digital Services: The IRS should act to immediately enhance digital services. This recommendation was emphasized by the NTA in her 2022 report, where she stated that creating robust online accounts should be the IRS’s highest priority and will prove to be the most transformational. TIGTA has found that the IRS has already made some missteps in this area.

Supreme Court Updates

Polselli Summons Case Heads To Supreme Court: The question the Supreme Court will seek to resolve is the IRS required to give notice when it issues a summons in aid of collecting an assessed tax? There is split between the Sixth and Ninth Circuits on this issue with the Sixth Circuit holding that answer is no, as long as the summons follows an assessment or judgment and was issued to aid tax collection. This interpretation places no limitations on the IRS and fails to protect private information from IRS overreach.

Circuit Court Opinions

Court Tosses Lawsuit Alleging Alleging Hollywood Foreign Press Association Bylaws Inconsistent With Its Tax Exempt Status: The petitioners in Flaa v Hollywood Foreign Press Association sought a declaratory judgment that the bylaws of the HFPA conflicted with its status as an IRC § 501(c)(6) trade organization, because they only benefit its members rather than the industry as a whole. The court dismissed the claim holding that the Declaratory Judgment Act limits courts’ jurisdiction to provide relief. There’s an exception to the DJA related to determining whether an organization is entitled to tax exempt status but only in actions brought by the organization itself.

Avoiding the Federal Tax Lien in Bankruptcy: In U.S. v. Warfield (In re Tillman) the Ninth Circuit determined that a chapter 7 trustee could not avoid the federal tax lien on the debtor’s homestead. The case involves an unpaid tax penalty, an NFTL for that amount, and property for which a homestead exemption was claimed.

Tax Court and District Court Opinions

Changing a Penalty – Graev Effect: The Petitioners in Castro argued that actions of a penalty-approving supervisor demonstrated he paid little or no attention when he signed the approval form, but that doesn’t matter to the Court. Signing the right form at the right time is all that matters. The decisionaffirms prior case law that the Court will not look behind a supervisor’s signature in the same way that it will not look behind a notice of deficiency.

Public Records Exception to IRC 6103: In McGowan the plaintiffs wanted to question the government’s expert about his experience in previous cases to see if it impacted his opinion in their case. The court cites to the general disclosure prohibition in 6103, but also to the exception for information that is part of the public domain. It finds the information was disclosed to the public in the prior Court Opinions and, as a result, it also finds that the protection of the information under §6103 is futile.

A Quick Hobby Loss Refresher: Why These Losses Are Useless (At Least Until 2026): In Gregory the TCJA’s disallowance of miscellaneous itemized deductions prevented the petitioner from claiming hobby expenses against hobby income. Petitioner argues that the hobby loss provision conflicts with section 67, and because section 183 is more specific it should preempt and allow for hobby expenses to be deducted above the line. The Tax Court disagreed, finding that the statutes were not in conflict. The Gregorys have appealed their case to the 11th Circuit.

Miscellaneous

The Low-Income Taxpayer and Form 1099-K: Most tax professionals have heard the news that the American Rescue Plan changed the amount required to be reported on forms 1099-K. Amounts more than $600 must be reported, regardless of the number of transactions. This change was supposed to go in effect this year but has been delayed until next. The public may not be as familiar with this change, so we, as practitioners, should seek to educate them about it.    

Racial Disparities in IRS Audits

Following up on Les’ post yesterday about the upcoming symposium on race and taxes, I want to draw our readers attention to an important study released yesterday, on the racial impact of Internal Revenue Service (IRS) audits, titled Measuring and Mitigating Racial Disparities in Tax Audits.  Now, before I launch into what the study found, let me make my usual disclaimer: I am not an academic nor am I an economist; I have zero expertise in statistics or in computer modelling.  But what I read in this incredibly coherent and well-written study is accessible to and understandable by someone such as myself (mathematical equations notwithstanding). Kudos to the authors!  And everyone should read this.

The study estimated the audit rate for Black taxpayers is .81 to 1.24 percentage points higher than the audit rate of non-Black taxpayers, implying that Black taxpayers are audited between 2.9 to 4.7 times more than the rate of non-Black taxpayers.  Further, the study projected that Black taxpayers claiming the Earned Income Tax Credit (EITC) on their returns are 2.9 to 4.4 times more likely to be audited than non-Black EITC claimants. 

The IRS does not gather racial or ethnicity data of taxpayers, so the researchers had to impute race by various methods that have been used in other studies.  The paper lays out the methodology and identifies the drawbacks to this.  Then, by using various models, the researchers found that racial differences in income, family size, and household structure still don’t explain the large disparity in audit rates.  Instead, it appears that audit selection algorithms based on the mere existence of underreported tax (i.e., a yes/no binary selection) or underreporting of refundable credits such as the EITC, the Additional Child Tax Credit, and the American Opportunity Tax Credit (AOTC) appear to contribute to the racial disparity in audit rates, whereas audit selection algorithms focusing on the predicted total amount of underreporting resulted in Blacks being audited less than non-Blacks.  Thus, the study concludes that the objective of the predictive model underlying audit selection, along with operational considerations such as employee expertise, costs of audits, and congressional or other expectations, can be “critical drivers of disparity.”

”read

Here are some of the fascinating data points from the study:

  • Black EITC claimants are audited at higher rates than non-Black EITC claimants within each decile of underreported taxes;
  • Black unmarried males with children claiming the EITC are audited at two times the rate of non-Black unmarried males with children claiming the EITC.  Similar audit disparities were found between Black and non-Black joint filers, unmarried females, and unmarried males with no dependents.  These disparities continued even after controlling for demographic characteristics such as filing status, household structure, or income, or the combination and interaction of these characteristics.  Thus, these characteristics alone don’t explain the racial disparity in audit rates.
Figure 6: Audit Rate Disparities by EITC Subgroup
  • Blacks and non-Blacks are audited at similar rates in field and office audits; thus the audit disparity is driven by the dominance of correspondence exams as the IRS tool of choice for individual audits.  As I’ve covered in other blog posts here and here, corr exam procedures and notifications are very problematic.  Add on to those problems the racial disparity, and you have a significant taxpayer rights issue.
  • Audit disparity between Blacks and non-Blacks are larger with respect to pre-refund audits, although the disparity exists in post-refund audits as well.  This is a significant observation; because the IRS is front-loading more compliance activity in the pre-refund environment, it is likely the racial disparity will be exacerbated going forward unless the IRS takes steps to correct for it.  

To test possible factors that might influence the audit disparity, the study’s authors built a risk-prediction model using National Research Program random EITC audit data (rather than the operational audits selected by the IRS automated algorithms).   Without going into all the details – I would probably butcher the description, and besides, you need to read the full study – they tested four methods of selecting taxpayers for audits:

  1. True Underreporting Amount:  returns were ranked by the amount of underreported taxes and then, in descending order, selected for audit until a pre-determined audit rate was achieved.  At each audit rate, the model selected Black taxpayers at a lower rate than non-Black taxpayers.
  2. Predictive Underreporting Amount:  Because at the time of audit selection the IRS does not know the true amount of underreported taxes, the authors built a model to rank returns for predicted underreporting based on what the IRS can see at the time of audit selection, and selected returns in a descending order until a specified audit rate was achieved.  This model detected twice the amount of underreporting as the “status quo” model (thus not sacrificing audit selection accuracy) while selecting Black taxpayers at a lower rate than non-Black taxpayers.
  3. Binary Classification Model:  Here, the authors compared the results of the predictive model (described above) with an algorithm that selected returns simply on whether underreported tax might exist.  The “classification” model selected Black taxpayers for audits at higher rates than non-Black taxpayers.
  4. Refundable Credit Model:  This model was trained to predict the total National Research Program adjustments for the EITC, AOTC, and ACTC, and then selected returns for auditing based on the descending order of the predicted overclaims, up to a specified “budget.”  Comparing this model to the baseline status quo model showed that the refundable credit model detects substantially less total underreporting (i.e., the EITC population has other types of underreporting) and selects Black taxpayers for audit at higher rates for non-Blacks for all budget categories.

Having demonstrated that the objective of the prediction model may be one factor contributing to racial disparity in audit selection, the authors considered what other factors/constraints might influence this disparity.  They identify limitations of employee expertise, the cost of audits, and certain policy goals.  So, for example, if underreported tax was attributable not just to EITC but also the reporting of business income, IRS employees may not be skilled in detecting this underreporting and such audits may need to be done in an office or field environment, which is much more costly than the “cheap” correspondence examinations.  The concern that business EITC audits require expensive and trained resources could push the IRS to conduct less expensive non-business audits.  Since Black taxpayers constitute 21 percent of non-business EITC returns and 11% of business EITC returns, these operational concerns would heighten racial disparity in audit selection.  In another simulation, the study found that operational constraints contributed to higher audit rates for Black taxpayers.

Another constraint is at the policy level — OMB’s classification of the EITC, ACTC, and AOTC as “improper payments,” Congress and the IRS itself have determined that to address these improper payments, IRS must conduct more EITC audits.  As the study shows, selecting based on EITC underreporting alone results in higher audit rates for Blacks.  (Note that nothing in the law governing improper payments requires audits.  Rather, it says agencies must come up with strategies to address these payments; those strategies can include education, outreach, soft compliance touches, and any number of non-audit approaches.) 

Now here is one of the key implications of the study – that even where audit selection processes are largely automated, so that there is no overt/intentional discrimination in audit selection, the focus or objectives of those automated processes can significantly impact racial disparity in audit selection.  By designing algorithms that select for underreported refundable credits rather than the totality of underreported tax, for example, the racial disparity continues. But what is really neat about this study is that it uses algorithms and machine-learning to ferret out what might be creating that disparity, which in turn can be used to improve the actual selection algorithm.

And one final note.  One thing that the study makes the case for and I have been harping about for a long time is the need to focus audit selection on amount underreported rather than specific issues like EITC.  The former approach accepts that dollars are fungible – i.e., a dollar of tax underreported because of unreported income or overreported expenses/deductions is the same as a dollar of tax underreported because of improperly claimed refundable credits.  It is only because of value-laden biases that we treat these two differently.  The study demonstrates the impact of those biases on differing racial groups.

I’ve only scratched the surface of this important paper.  I’m sure I’ve missed some of the points, and I intend to study it further.  There’s much more work to be done here, which is what the authors say in closing their report:

[O]ur analysis of counterfactual audit algorithms does not account for the full set of constraints facing tax authorities like the IRS, such as the types of compliance issues that can be explored through correspondence audit, or differences in audit response rates depending on whether the audit is pre- versus post-refund. A more complete optimal policy analysis would require accounting for these additional objectives and constraints. Finally, audit selection constitutes only one dimension in which tax administration may differently affect taxpayers by race. Disparities may also exist with respect to such processes as collections, appeals, settlements, and guidance (citations omitted). The approach described in this paper can serve as a foundation to explore disparities in these areas as well.

Next Month’s Symposium Highlighting Relationship Between Tax and Race

I am writing to share information about an upcoming Symposium to be held on February 24, 2023 in Washington, D.C. on “The Federal Income Tax: Racially Blind But Not Racially Neutral.”  The symposium is free and open to the public. 

There are in-person and Zoom attendance options, with pre-registration here and a flyer with more information here. The program is sponsored by the American Tax Policy Institute and co-sponsored by the American College of Tax Counsel, the ABA Tax Section, Skadden Arps Meagher & Flom LLP, the Center for Tax Law and Public Policy at Temple University Beasley School of Law, the Elisabeth Haub School of Law at Pace University, and the Pittsburgh Tax Review.  The symposium comes at a time of increased attention concerning the relationship between tax law and racial justice. Professor Dorothy Brown’s book, The Whiteness of Wealth, has justifiably received wide recognition for shining a bright light on how the tax system disproportionately favors White Americans, reinforcing our country’s racial wealth gap.

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On his first day in office, President Biden signed Executive Order 13985, Advancing Racial Equity and Support for Underserved Communities Through the Federal Government. And this past week, Treasury has released a working paper estimating the distribution of certain tax breaks by race and ethnicity. There is a Treasury blog post highlighting the main take aways from this important paper.

As the Treasury blog post notes,

The IRS does not collect information on race and ethnicity on tax returns, so to facilitate analysis of disparities in tax policy, the Treasury Department has developed an approach to impute race and ethnicity in tax data, which it will continue to refine. Using this approach, the Department has conducted a first-of-its-kind analysis of the impact of tax expenditures on racial and ethnic disparities, which will increase transparency and improve our understanding of how existing tax policies work.

In the study, Treasury found that preferential rates for capital gains and dividends, deduction for pass-through income, charitable deduction, home mortgage interest deduction, and deduction for employer-provided health insurance disproportionately benefit White families.

In contrast, Treasury notes that “Black and Hispanic families, who make up a disproportionate share of low-wage workers, disproportionately benefit from the Earned Income Tax Credit” And “Hispanic families, who have comparatively low rates of employer-sponsored health insurance, also disproportionately benefit from the Premium Tax Credit, which provides assistance for the purchase of health insurance through the Marketplaces. Finally, Hispanic families disproportionately benefit from the Child Tax Credit.” 

The Feb 24th Symposium thus comes at an important inflection point for scholars and others interested in how the tax system relates to issues of racial justice, and includes panels on the following:

• Race, History, and Taxation

• Tax Systems and Privileged Choices

• Systemic Inequalities Undergirding Facially Neutral Tax Laws

• Discrimination through Non-Discrimination

I am thrilled to participate, as I will discuss the relationship between tax administration and racial justice, an especially important topic given how, for better or for worse, Congress increasingly tasks the IRS to play a main role in distributing benefits relating to poverty relief, creating work incentives, and subsidizing health care, housing, and energy efficient consumption. The Center For Taxpayer Rights will explore these themes further in the fall of 2023 as part of its successful Reimagining Tax Administration series. The Center’s first Reimagining Tax Administration series in 2021 addressed running social programs through the Internal Revenue Code, and the 2022 series explored taxpayer rights at the state level. With its upcoming series Racial Impact of Tax Administration, the Center will follow up on many of the themes likely to be explored in the February 24th Symposium.

While virtual and in person attendance for the February 24th Symposium is free, there are limited spaces, so I encourage those of you interested to register asap.

Getting Refunds in Collection Proceedings: Why CDP Matters

In my last two posts (see here and here) I have tried to put into perspective how a taxpayer is and isn’t constrained by the Tax Court’s lack of “refund” jurisdiction in CDP cases. In my posts I have tried to explain that the Tax Court may (1) functionally determine an “overpayment,” so long as it pertains to the propriety of a collection action, and (2) order the IRS to return money to the petitioner, so long as it is not a “rebate” refund (i.e. money representing an overpayment).

In this post I want to expand on the ability to get a refund in CDP a bit more, with a focus on how even if what you’re really after is the determination of an overpayment with a (rebate) refund, CDP may still be of use. To get there, we need to think a bit more holistically about how the CDP process really works, rather than just focusing on the (occasional) end-product of a Tax Court order.

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So you think the IRS should give you money and you have the opportunity for a CDP hearing… Returning to my wrongful state tax levy example may help illustrate the problems with throwing up one’s hands and cursing Greene-Thapedi for CDP’s futility.

As a refresher, in my earlier post I stated that if I had a case where the IRS took a state tax refund without giving the (legally required) prior notice, I would demand that money back in a CDP hearing. In the comments, Carl noted that every court thus far has found that the Tax Court does not have refund jurisdiction. Carl also compared the statutory language of Tax Court CDP jurisdiction (IRC § 6330(e)(1)) with that of the Tax Court’s refund jurisdiction in deficiency cases (IRC § 6213(a)). On his reading (and having no small amount of knowledge on the area of all things jurisdictional), Carl speculated that the Tax Court also likely wouldn’t find it had the injunctive grant of power to return the improperly levied state refund.

Perhaps.

In my prior two posts I think I’ve explained why I don’t think that’s the case. But let’s leave that alone for now. Instead, let’s focus on everything that would happen before actually getting to the Tax Court.

How CDP Cases Actually Play Out – Multiple Chances for Remedy

If the facts are abundantly clear that the IRS did not send the proper, legally required notice prior to levying on my state tax refund, it is possible that the CDP hearing will end without ever needing Tax Court involvement. Perhaps you get a reasonable Settlement Officer who takes seriously their statutory obligation to investigate that “the requirements of any applicable law or administrative procedure have been met.” IRC § 6330(c)(1). Clearly, they were not followed in my hypo.

Admittedly, it is an open question of whether the IRS should necessarily have to give back the state tax refund just because the applicable rules were not followed. Perhaps the IRS could make some sort of harmless error argument, if I really don’t have a good alternative to levy. But it is also pretty easy to come up with facts where the IRS’s own policies would suggest that they shouldn’t have levied -for example, if the levy would cause (or exacerbated) economic hardship.

Importantly, it is also clear that the IRS “can” give a state refund back to the taxpayer. The IRM suggests that there are a number of situations where it may be appropriate to return a state tax refund levy (see IRM 5.19.9.3.7). The IRM also suggests returning the refund if there was a finding of economic hardship. See IRM 5.1.9.3.5.1(8).

So with the right facts and a reasonable Settlement Officer the IRS just might agree to give you back the improperly levied proceeds in their (favorable) determination letter. Obviously, being provided the relief you sought, you would petition the Tax Court thereafter, and no Tax Court involvement would ever take place.

The system (in this case, buoyed by a truly “Independent Office of Appeals”) works!

Indeed, this is precisely what I suggested in my post on the CP504 Notice, where I mentioned the value of CDP while also (in the same sentence) mentioning the limitations on refund jurisdiction in Tax Court. Simply put, you can get a refund in an administrative CDP hearing that you may never get “ordered” in CDP litigation.

But what if the Settlement Officer issues an unfavorable notice of determination? Good news: you still don’t (yet) need the Tax Court to order a refund. You just need reasonable IRS Counsel after your petition.

Believe it or not, even huge bureaucracies like the IRS are ultimately made up of people -most of whom want to do the right thing. I’ve had multiple petitions on CDP determinations where there is a plain error made by IRS Appeals. On the egregious cases I’ve had, when IRS Counsel gets the petition they ask me, “what can we do to fix it?” Sometimes IRS proposes a fix that the Tax Court would not be able to order on its own. As an example, I had a CDP case where IRS Counsel proposed removing penalties as a fix, even though (in our posture) there was no possible way of the Tax Court providing that remedy.

Of course, the obvious next question is “but what if IRS Counsel doesn’t agree with you?” Well, then you just may get to a Tax Court order. But even still, I think the Tax Court can play an important role without directly ordering a refund.

Doing the Right Thing, With the Right Motivation

Back to the Schwartz opinion from my first post…

In Schwartz the Tax Court found that the petitioner didn’t owe for two years (2006 and 2007) but did owe for others. Accordingly, the conclusion of the opinion states that the Tax Court does “not sustain the proposed levy for those years.” What are the consequences of this opinion?

I suppose you could read it extremely narrowly: the IRS cannot levy for 2006 and 2007. That’s it.

Or you could read it more accurately: the IRS cannot levy and should adjust their accounts to show no balance due for those years.

There is a subtle difference between the two.

Theoretically, if the order didn’t require the IRS to adjust the account balance but only said “the IRS cannot levy” for 2006 and 2007 the IRS could still maintain that there is a balance due, and even offset against it, effectively collecting while not running afoul of the Tax Court order. This would read an opinion (and order) as only pertaining to the propriety of a levy, and not addressing the underlying rationale.   

But it is unthinkable to me that the IRS would fail to adjust the accounts, not least of all because the opinion makes explicit that the Tax Court has found no balance due. So it shouldn’t really matter if the ensuing order tacks that on… but therein lies the rub.

As I said before, Tax Court opinions matter. And this is why remands aren’t a useless remedy. I ended my first post with the hypo where the Tax Court finds that the IRS erred in failing to credit the taxpayer’s account with $5,000 on a $3,000 liability. Conceptually, not that different from Schwartz or even the issue in Melasky… albeit in my hypo, the Tax Court has a favorable finding for the taxpayer.

What happens next?

The Tax Court opinion finds that the IRS erred in failing to credit money to the taxpayer’s account. But the Tax Court order only remands the case to IRS Appeals to address this error in a supplemental hearing: it does not “order” a refund.

The opinion, frankly, should be enough to get you where you want to go. When the Tax Court kicks the case back to Appeals, the IRS should get the (literal and figurative) memo. It will either make the adjustments required of the opinion’s reasoning or be stuck in a doom-loop of remands for errors of law in its supplemental determinations.

In my experience, this is actually a pretty non-controversial understanding of how the Tax Court works in CDP, even on “vanilla” collection issues. The Tax Court almost never “orders” specific relief (e.g. “the IRS must accept this Offer,”), but rather remands solely on abuse of discretion (e.g. “the IRS abused its discretion in rejecting this Offer,”). Where taxpayers ask for more, they usually don’t get it, even when they clearly win on abuse of discretion. See, for example, Antioco v. Commissioner, T.C. Memo. 2013-35 (Judge Holmes finding abuse of discretion, but not ordering the IRS to enter into an installment agreement).

Conclusion: Maybe You Don’t Need an Order of Refund, or Even Refund “Jurisdiction”

The IRS’s mission isn’t to cling tightly to as much money as it can that comes through its doors. And the IRS attorneys I’ve worked with likewise don’t tend to see this as their job. I am confident that if I had a court opinion saying “IRS you were wrong to take this money,” the IRS wouldn’t say “But we’re keeping it until you can find a judge to specifically order us to give it back.”

It is, perhaps, a hassle that the Tax Court can’t or won’t act as a one-stop shop to order these refunds, and that a particularly recalcitrant IRS employee could force the taxpayer to seek redress in federal district court. But I don’t think this is what happens in most instances.

At the administrative level, the IRS can surely make the changes to its accounts “behind the scenes” in CDP, and without the Tax Court expressly ordering them to do so. I expect that’s how most CDP cases resolve.

But even at the Tax Court level, it is important to recognize that the parties can enter decisions that provide more detail and more protection than just “the Notice of Determination is (or is not) sustained” without running into jurisdictional traps. Indeed, going beyond the limited jurisdictional issues before the Tax Court judge is what negotiating “below the signature” stipulations is all about (PT posted a helpful IRS guide on that issue here).

And while it might not be a Tax Court “order,” having stipulations dealing with the future actions of the parties (e.g. “the IRS will credit Petitioner’s account with $x”) is not too shabby.  

Getting a Refund in CDP: Don’t Call it a (Rebate) Refund

In my previous post I discussed how the Tax Court can effectively find there was an “overpayment” in CDP jurisdiction, even if it doesn’t (or can’t) order a “refund” thereafter. This, I argued, is essentially what happened in the recent case of Schwartz v. Commissioner. In this post I’ll take things a step further by arguing that the Tax Court can (effectively) order a refund in CDP, even if it can’t quite use those exact words.

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Imagine that the IRS levied on your state tax refund when it has not properly followed the procedures (that is, the law) prior to doing so. Fortunately, under IRC § 6330(f) you are provided a CDP hearing after the levy. You are pretty upset: indeed, you want the money back for the IRS’s improper levy.

Months ago, I wrote about this exact scenario with the IRS CP504 “Notice of Intent to Levy.” I argued if the IRS does not properly send the CP504 (for example, it isn’t sent to the “last known address”), the IRS should have to return the levied proceeds to the taxpayer. I suggested that this be done at the CDP hearing.

Carl Smith noted in the comments section that you probably wouldn’t be able to get these proceeds returned in CDP because the Tax Court does not (believe itself to) have “refund jurisdiction.” See Greene-Thapedi. And I completely agree with Carl that if you ask the Tax Court to “order” a “refund” in CDP it isn’t going to happen.

But I don’t think that ends the inquiry or addresses the actual hypothetical I laid out. And it is important to understand why.

It is fair to say that the Tax Court has tended to take a rather narrow view of its ability to order refunds in CDP litigation. The posts here and here detail multiple cases where the Tax Court (and affirming appellate courts) say “sorry, but if you’re asking for a refund you’re in the wrong place.”

One could therefore be excused for looking at these decisions and saying “if you’re asking for money back, it isn’t going to happen in CDP.” In a likely ill-advised effort of providing a mnemonic device, I’m going to refer to this approach as being a “Thapedi-Thumper,” since a broad reading of Greene-Thapedi really forms the backbone of this belief.

I see two fundamental problems with the Thaepdi-Thumper approach. The first problem is focusing too much on the need for the Tax Court’s jurisdictional power to order a refund. The second, related problem, is a failure to focus on the actual people and actual processes that resolve the bulk of CDP controversies.

I will cover the second problem in my next post. For now, let’s look at if and when you really need “refund jurisdiction” in CDP to get the remedy you’re asking for.

Overpayments and Refunds – Keep Them Separate

In my previous post I noted the distinction between an “overpayment” and a “refund.” Namely, that an “overpayment” is what happens when you have more credits/payments than tax, and a “refund” is when the IRS actually sends that excess money to you. It is important to keep those notions separate.

Let’s start with the Tax Court and overpayments in CDP. I think it’s clear that the Tax Court is actually less averse to making determinations about the existence or amount of overpayments than Thapedi-Thumpers may believe. Indeed, Greene-Thapedi itself suggests this in the oft-cited and tantalizing “Footnote 19,” which provides:

We do not mean to suggest that this Court is foreclosed from considering whether the taxpayer has paid more than was owed, where such a determination is necessary for a correct and complete determination of whether the proposed collection action should proceed. Conceivably, there could be a collection action review proceeding where (unlike the instant case) the proposed collection action is not moot and where pursuant to sec. 6330(c)(2)(B), the taxpayer is entitled to challenge “the existence or amount of the underlying tax liability”. In such a case, the validity of the proposed collection action might depend upon whether the taxpayer has any unpaid balance, which might implicate the question of whether the taxpayer has paid more than was owed.

To me, the footnote suggests that the Tax Court may consider overpayments when relevant to a proposed (i.e. not mooted) collection action. The Schwartz case is consistent with this: there was still outstanding tax on multiple years (i.e. no refund would result), but the “validity of the proposed collection action” on the years where there was an overpayment would obviously not be upheld. That’s why Judge Vasquez said it didn’t matter if he looked at the issue from abuse of discretion or de novo: the levy wouldn’t be sustained either way.

The problem is that so many taxpayers (understandably) want to take it a step further: they have an overpayment, so why not also order a refund? That’s what the taxpayer in McLane v. Commissioner (T.C. Memo. 2018-149) wanted, and that’s what the Tax Court resisted. As far as collection went, the “overpayment” tax year at issue (2008) was already fixed by the parties, with the IRS abating the assessment.

So let’s move to when, if ever, you might get a refund in CDP litigation. On that question I’d say that it is clear the Tax Court will not order a refund of an overpayment. But the Tax Court may order a refund of other ill-gotten funds.

What does that mean? It means that if you are saying you “paid more tax” than you have due (i.e. an overpayment) you are out of luck in CDP litigation. But if instead you are saying the IRS took money they shouldn’t have (say, by failing to follow proper procedures), you may just get your money back.

If you want to put a technical spin on it, I’d say that the Tax Court is averse to ordering “rebate refunds,” and perhaps less averse to “non-rebate refunds.” Again, I commend Professor Camp’s article to those who want to learn more about the distinction between the two. For present purposes (and possibly in contravention of what Professor Camp himself would agree to), I’m going to classify any disbursement of money to the taxpayer that doesn’t result from an overpayment as a “non-rebate refund.”

You may say I’m a dreamer, but I’m not the only one: Chocallo v. C.I.R., T.C. Memo. 2004-152.

The Chocallo opinion involves a disgruntled pro se petitioner asking the Tax Court to exercise all sorts of powers it does not have in CDP: namely, criminal prosecution of IRS employees and other monetary compensation. The Tax Court pretty easily determines it doesn’t have jurisdiction to do so. But you might ask why the petitioner was so upset in the first place…

And that’s where things get interesting.

The Tax Court found that the IRS had levied on Chocallo’s bank account (for approx. $23,000) prior to offering her a statutorily required CDP hearing. (The IRS later discovered that the underlying assessment was invalid too… oops.) Because the levy improperly occurred prior to being offered a CDP hearing the Tax Court, in Judge Ruwe’s words, “ordered that the amount collected by levy be returned to petitioner with interest.”

Wow. Ordering money being returned in a CDP hearing… How are we to unpack this?

The Chocallo opinion was issued before Greene-Thapedi, which is important. The Tax Court was aware of Chocallo when it gave its opinion… and in approximately three paragraphs discussing Chocallo, gave no indication that it disagreed with the return of the improperly levied proceeds. Indeed, the court thought it an important distinction that Chocallo dealt with an improper levy rather than offset, as was the case in Greene-Thapedi.

This is all to suggest that Chocallo is in fact consistent with Greene-Thapedi. The Court doesn’t find it necessary to explain why Chocallo is consistent, but I can think of a couple reasons it might have latched on to.

First, one could argue that what the Tax Court did in Chocallo was not to order a “refund” or even to determine an “overpayment.” Instead, it ordered the IRS to “return” certain levy proceeds. Note, importantly, that as I define it, these would be “non-rebate refunds.” The return of money in this case has nothing to do with whether there was an “overpayment” or not: it just has to do with the propriety of the collection action.

(As an aside, note that this is exactly the remedy I’d be asking for in the hypothetical involving an invalid CP504 Notice and levy on state tax refund I posted on, which Carl seemed to disagree with me about. Because I can’t let it go, more on why, regardless of Chocallo, I think I’d have a good chance of getting the levied proceeds back in CDP in my next post.)

Second, one could read Chocallo as merely addressing a procedural wrong (levy prior to CDP hearing), that in a very real sense has nothing to do with the “underlying liability” of the tax, and everything to do with the levy action itself. And what exactly is the Tax Court given jurisdiction over if not a review of the propriety of levy actions?

Indeed, PT has covered something quite similar before in Cosner v. Commissioner. Strangely enough, the Tax Court seems to care when the IRS improperly levies in CDP litigation reviewing the propriety of levy actions…

Reasons to Doubt My Optimism

Yet despite everything I’ve written, one could still be excused for wondering how much a “non-precedential” (reasons for scare quotes in this post) memorandum opinion from 2004 can really open the door to getting money back in CDP. Similarly, is the Tax Court really going to be swayed by arcane (and questionable) distinctions between “rebate” and “non-rebate” refunds?

I think the issue has yet to be determined. The case that actually worries me the most isn’t Greene-Thapedi or any of the other “please give me a refund of overpayment” cases. Rather, it is the much-maligned Brown v. Commissioner saga (as written about here, here and here among other places).

It appears that the litigious Mr. Brown asked the Tax Court to provide a refund of his TIPRA payment on his returned Offer in Compromise… and the Tax Court said it has no such jurisdiction. That would very plainly be a “non-rebate” refund. A big strike against the distinction I’ve attempted to draw, albeit in a non-precedential opinion. I’ve also previously complained about the Brown’s case failure to raise administrative law arguments, and I seriously doubt that it raised the rebate/non-rebate distinction here, so perhaps the argument could still persuade a judge. But the existence of this opinion makes the fight a little more uphill.

Nonetheless, I’d note that Brown had relatively bad facts for the taxpayer. I’d also note that Greene-Thapedi, McLane, and others tend to have extremely convoluted fact patterns. It is possible that when the issue is a bit more clear-cut (IRS didn’t follow proper procedures) the Tax Court may be willing to order appropriate relief, short of a “rebate refund.” The Tax Court does, I believe, want to fix obvious wrongs so long as it has the jurisdictional “power” to do so.

So long as there is an obvious inequity and the remedy doesn’t violate refund jurisdiction, the Tax Court can help. Note that Greene-Thapdedi references (without criticizing) Chocallo’s return of the improperly levied proceeds as an exercise of the “Tax Court’s inherent equitable powers.” The precedential case Zapara v. Commissioner (126 T.C. 215 (2006)) is also a very clear exercise of inherent equitable powers. And again in 2006 (albeit in the non-precedential Sampson-Gray v. Commissioner, T.C. Summ. Op. 2006-19), the Tax Court (1) references its inherent equitable powers, (2) cares about whether there was a procedural defect to be remedied, and (3) “expects” the IRS to do the right thing and credit the taxpayer with the money that is due to them (see footnote 5).

Put together, this means that you may not be out of luck in Tax Court during CDP litigation when you’re asking for money back, so long as you aren’t asking for an “order” of a (rebate) “refund.” But beyond that, as I’ll detail in my next post, even if what you want is undeniably a rebate refund, CDP may still help get you where you want to go.

“Refunds” and CDP Review

In a post months ago, I wrote that if the IRS improperly levied on a state tax refund by failing to give required notice, I would ask for the money back in the CDP hearing. In the comments to my post, I was promptly reminded of the Tax Court’s lack of “refund jurisdiction” as well as its (possible) lack of injunctive power to order a return of the improperly levied funds.

In response, I started writing about why I don’t think that the lack of refund jurisdiction or lack of injunctive power ends the conversation or dooms my argument: in other words, that even without a Tax Court order, I still think I’d have a decent chance of getting my money back if the IRS (clearly) improperly levied and I raised that issue in a CDP hearing. Then life happened and the post got put on the back burner. In the interim, however, another CDP case caught my eye: Schwartz v. Commissioner, T.C. Memo. 2022-125. The opinion is interesting for a number of reasons, but for me it really drives home two points: the power of framing the issue, and the functional ability of the Tax Court to fix problems in CDP even if it cannot “order” certain relief from the IRS. More below the fold:

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The Power of Framing

In CDP review, quite a lot hinges on how you frame the issue (and your proposed relief) to the Tax Court. Frequently this comes up in the context of disputing the underlying liability. Depending on exactly how you frame your issue (more accurately, how the Tax Court interprets the issue), you may get de novo review instead of abuse of discretion: that’s the crux of the precedential Melasky case covered here (with links to additional coverage therein). (Note also that if it is a pure merits issue you may not even be able to raise it at all (see, for example posts here and here).

Context matters in determining the proper way to frame an issue. I’ve posted on this previously, with regards to summary judgment motions. But I’ve also posted about how in CDP the seemingly straightforward argument “I don’t owe the tax” can be framed in different ways. The Tax Court could look at that as a “merits” argument (disagreeing with the calculation of the tax) or a “procedure” argument (disagreeing with the IRS books for continuing to show an outstanding liability).

Which brings us to Schwartz, which is something of a hybrid between the two.

In Schwartz, the taxpayer (led by estimable counsel Karen Lapekas) essentially argued that they “don’t owe” for the years at issue because they had a credit-elect under IRC § 6402(b) that would wipe out each liability. For more on the many nuances of credit-elects, see posts here, here, and here. For our purposes, all that you need to know is that the taxpayer claimed they overpaid for 2005, applied that overpayment to the next year (i.e. the “credit elect”), and that resulting overpayment for 2006 was applied to the next year… and so on and so on in a cascade, that effectively resulted in no balance due for any of the years before the Tax Court.

I highly recommend reading the opinion for details both on the metaphysics of credit-elects, and the “informal claim doctrine” (see posts here and here). Those were the substantive issues that Judge Vasquez spent most of his time wrestling with. I’m going to largely ignore them to focus on a procedural issue that Judge Vasquez… didn’t quite ignore, but definitely sidestepped.

When a taxpayer says “I don’t owe” in a CDP case, and the reason they “don’t owe” is a credit elect, what is the standard of review? There are definite undertones of merits issues/challenges to the liability (it is a “credit” that is claimed on a tax return after all) and procedure (that “credit” happens to be in Subtitle F, which covers procedure and it really is just the application of a payment).

The Tax Court hasn’t quite made up its mind on how that works with credit-elects. Judge Vasquez notes that in one case (Landry v. Commissioner, 116 T.C. 60 (2001)) the Tax Court applied de novo review to a credit elect issue. However, later in the aforementioned Melasky case, the Tax Court applied abuse of discretion review to the dispute over whether a payment was properly credited to the taxpayers account -which is pretty fundamentally similar to a credit elect. What to do here…

Fortunately, Judge Vasquez determined that he didn’t need to reach that question because the IRS would lose on abuse of discretion or de novo review… that tends to happen, I suppose, where the judge finds that IRS Appeals erred on a consequential matter of law.

Ultimately, Judge Vasquez finds that Mr. Schwartz had a valid credit-elect for some years (2006 and 2007) but that the record wasn’t sufficient to show that the carryforward “cascaded” to later years (2010 – 2012). Because of this, the IRS proposed levy action is “not sustained” for 2006 and 2007, but is for 2010 – 2012.

Why Schwartz Matters: A Refund By Any Other Name?

I think it is important to consider what the Tax Court functionally did in this case. Effectively, it determined an overpayment for multiple years. I really don’t think you can get around that conclusion for the concept of a cascading credit-elect to make any sense.


Maybe that’s no big deal: the Tax Court even hinted as much in Greene-Thaepedi that it might determine overpayments in some circumstances (see footnote 19). Also, one could say that in Schwartz the Tax Court was only looking at the timing of an overpayment, and didn’t determine the amount. Further, in Schwartz, the Tax Court didn’t order a “refund,” which is what we really care about.

(It’s also worth highlighting that it was Judge Vasquez (with Judge Swift joining) who dissented in Greene-Thapedi, believing that the Tax Court did, in fact, have something akin to refund jurisdiction. In that regard, Schwartz may have had had a “good draw” on the judge deciding his case.)

But Schwartz definitely doesn’t conflict with Greene-Thapedi, and I’d suggest the most important reason why is this: a refund is different from a determination of overpayment. An “overpayment” is a determination that the taxpayer had more credits/payments than tax. A “refund” occurs when the excess is sent to the taxpayer. See IRC § 6402(a). A lot of people have “overpayments” but still don’t end up with “refunds.” That’s because they owe other back taxes, child support, student loans… or perhaps choose a credit-elect rather than a refund.

(For more on the contours of overpayments and refunds, I would recommend an older article from Professor Bryan Camp found here. I have returned to it again and again when dealing with the metaphysics of refunds, assessments, and all other forms of tax procedure geekery ordinary people dare not dream of.)

But even if there was only the determination of an “overpayment” and not the order of a “refund,” in Schwartz, I think it holds another important lesson. And that lesson is this:

Court opinions have consequences.


Well duh, you reply. But what I’m getting at is that an “opinion” can carry consequences even if it isn’t followed by a particularly useful “order.”  In other words, even if the Tax Court doesn’t have “refund jurisdiction” in CDP to “order” refunds, it may nonetheless have a functionally equivalent power when it determines that the IRS erred as a matter of law.

To illustrate, imagine that the Tax Court issues an opinion finding that the IRS erred in failing to credit $5,000 to a taxpayer’s $2,000 liability. As we’ve seen in Schwartz, even in CDP cases the Tax Court can clearly make such a determination. What the Tax Court (arguably) cannot do is follow that opinion with an order that the IRS refund the taxpayer $3,000. But the Tax Court can remand for abuse of discretion on proposed collection of a non-existent liability.

And what happens next?

In my next two posts I’ll explore that question and dive again into just how close to getting a “refund” you can get in CDP even without “refund jurisdiction” in Tax Court.